Nokia’s downgrade defense: We’re focusing on fundamentals

Corporate finance is hardly sexy, but it is often rather blunt. On Monday, Moody’s, a very important credit rating firm, downgraded Nokia to just one step above ‘junk’ status. That raises the price that Nokia can borrow money at, and sends a poor message to its investors.

Credit downgrades are painful for firms, as they squeeze a company; if Nokia really was having such a hard time before the downgrade, they will now have all the more struggle.

According to Reuters, Nokia offered the following defense: “Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position.” That response to the cutting of its long-term credit rating, is important. The firm is essentially saying that it will continue to focus on the very core of its business, and that it has been all along.

Nokia does have a huge cash hoard, totaling some 9.8 billion euros. Now, after all its liabilities are subtracted, that number shrinks to just under 5 billion euros, but the company is hardly poor. What is troubling are its continued losses; as the firm transitions to Windows Phone, a painful period of change has come to the company. Its new phones are ‘exceeding’ its own expectations, but continued short-term losses have some wondering if they aren’t really so short after all.

Still, Nokia has the cash to continue its operations for the time being, and it has Microsoft on its side, which could dive in with a fistful of dollars whenever needed. However, Moody’s move shows that the financial markets are not yet sold on the company’s new direction. The Lumia 900 may either silence those critics, or prove them right.